Sign up  |  Log in

Nominal Interest Rate Face Value

Why is the nominal interest rate (and not the yield) used to calculate the purchase price?

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

It isn’t used to determine price.

I’m not sure what you mean.

Do you have an example?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Section 4.1.1 of Working Capital Management.

Purchase price = $1,000,000 - [(0.05 (nominal rate) x (1/12) x $1,000,000)] = $995,833.33

Aha!

You’re talking about T-bills!

A T-bill is priced using a bank discount rate, unlike … well … every other bond out there.

Review BDR in quant.

(By the way, some of the stuff on bonds in Corporate Finance is just plain weird.  Their definition of Bond Equivalent Yield, for example, makes no sense whatsoever.)

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

Aha!

You’re talking about T-bills!

A T-bill is priced using a bank discount rate, unlike … well … every other bond out there.

Review BDR in quant.

(By the way, some of the stuff on bonds in Corporate Finance is just plain weird.  Their definition of Bond Equivalent Yield, for example, makes no sense whatsoever.)

That gave me a little headache when I encounter those two formulas in different books…

Thanks for the heads up!

You’re quite welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/